19 Minute Read

Environmental Hedging: Asset Allocation

July 25, 2017

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Como Va Tackle Traders!

So here I am in ancient Rome thoroughly enjoying myself. It is an incredible place and hope that each and every one of you can one day enjoy it’s splendor. I mean, this place is so old you can literally smell the difference. Sounds weird but if you have ever been here you know what I am talking about.

The cool part is that most of my adventure so far has been funded by United States Steel and Freeport McMorhan. So much in fact this last few weeks in the market has ensured a high quality experience—I can eat at nice places, stay in the finer echelon of hotels, and spare no expense. That said, if you know me, then you know that I enjoy the fringe, if that makes sense. So I’ll save that coin for when I need it and stay true to my roots… Assuredly I will have a down week at some point and since I have a strict series of guidelines bestowed upon me by Matt and Tim Justice, best I be frugal.

That, and its earning(s) season, folks. Fortunately for us most of what we are trading have similar earnings dates so I won’t have to be out of the market for too long. Maybe 2-4 days, max…assuming nothing crazy happens. So, let’s get into this…

Robin Hoods:

X—United States Steel.

Earnings for X is on the 25th and last go around it dropped more than 25%. It was so bad their C.E.O. was let go as a result. This go around who knows what is going to happen. Thus I will be out of all naked puts come Monday, 3pm E.S.T.. Hopefully earnings is a bore and we can get back in shortly after.

FCX—Freeport McMorhan

FCX also has their earnings on the 25th. I have a more positive take on earnings for them than that of X. Copper prices are on the rise and their miner’s strike in Indonesia does not seem to be costing them too much money. But you never know and why risk it, right?

GDX—Vanneck Vectors Gold Miners E.T.F.

Since this is an ETF they do not have earnings… But as I have mentioned in the last three blogs I am slightly bearish on precious metals at the moment due to a rising interest rate environment, remember?

That and I gave a resistance point in and around 1240, remember? Which is where it is hovering at the moment. If it breaks out of that channel, however, I may be issuing another round of naked puts. Let’s see what happen this week.

Targeted Stocks:

SPWR—Sun Power Inc.

Since I am an owner of this guy I am planning on holding through earnings. Since SPWR recently received a major energy contract and I bought at such a low price I am just going to cover it and see what happens. But thats just me. If you have just recently purchased SPWR it may not be such a bad idea to sell and then buy back after earnings. Use your best judgement.

FLSR—First Solar Inc.

I will be selling my position on the 26th on FSLR. Traditionally earnings for FSLR is very hard to predict. Indeed, like SPWR, they have been getting some decent energy contracts, but a little tid-bit about FSLR is their accounting methodology. Im not sure exactly what the name of the method is, (I am not an accountant), but its a method that on paper makes their earnings seem better than what they really are, fundamentally. Sometimes Wall St. doesn’t buy into this and in the past I have had some surprises with earnings on FSLR. I most certainly plan on buying back in the day after in spite of what happens.

TSLA—Tesla Motors.

As mentioned in Week 2 I am not an owner of TSLA stock, but merely a short-term practitioner, this is another one I am going to stay away from. Fortunately for us we have until the 2nd of August and that gives a bit more time to prepare…I very much want to open a trade on this one, but its a high value stock with a large A.T.R. If something went against you it could be a very costly mistake. We want to make money, not loose money.

Environmental Hedging: Position Size Philosophy and Account Structure.

I have received a few questions from students concerning account structure, position size, and diversification. Questions such as: “Is this the only system you trade?” “Are these the only stocks and E.T.F.(s) in your portfolio?” “How much should I invest?” How much do you have invested?”

Allow me to explain my views and approach to the above mentioned… It all comes down to position size philosophy and account structure. Ill first explain philosophy, then I’ll dive into the specifics.

Tim Justice once told myself and another student of ours that if he had to place his money on one of two types of traders; 1) a master technician; or, 2) a modest technician but one who understands position sizing very well, he would always choose #2…any day of the week.

The reason is rather deep on one level and obvious on another. On the more obvious side of things, a well-balanced portfolio is like a well-balanced diet, and having the correct proportions of variety will insure the porridge is not too hot, but not too cold. Indeed, you may not have as much upside explosions in account value, but then again you won’t have accounts that drop drastically in value. This will keep you sane and keep you in the game over the long term.

The deeper meaning of Tim’s statement is rather profound. And since Tim is an armchair philosopher I will put in in philosophical terms.

So, I am sure most of you have heard of this guy named Socrates, right? Well, besides being one of the founders of Greek Philosophy and Western Civilization he is famous for a statement: “a life lived unanalyzed is no life to live at all.”

When I was doing my Masters in Philosophy my favorite professor told me that particular statement wasn’t to be taken at face value, but was actually a statement of humility. You see, Socrates made this statement after he was condemned to death and after making this statement he strangely requested that a rooster be there when he passed. In Greece at the time the rooster symbolized the coming of not only new beginnings, but the end of an age.

For Socrates, we never know what that new day will bring and sometimes what you think you know for sure may not in fact be the case. Socrates was absolutely right about the Greek government at the time but what he could not anticipate was that his perspective would cost him his life. There were variables he could never anticipate.

What he was saying, at the end of the day, (literally at the end of the day), was that we know nothing. It was a summation of humility. Which is why in the haunts of philosophy he is known as the “snub-nosed orator”. He was arrogant and his arrogance cost him his life. This was his final admission, the only thing he said he was guilty of before he drank the Hemlock.

The market is no different on many levels and requires large amounts of humility. Since we are dealing with our livelihoods even when I am faced with a “sure thing” and all indicators point to one direction and one direction alone I can’t bring myself to go “all in” from a portfolio perspective. Basically, I just don’t believe that I could ever know more than the overall market does and that there is something I am missing. As the great Jesse Livermore once said: “markets are never wrong… People, however, often are.”. You’ve got to stay humble if you are going to be successful in this business.

In such a light, it important to approach your business in a similar fashion and structure it in a manner that will account for when you are wrong. Furthermore, it’s not about being right or wrong in the first place. It’s about being able to make money no matter what happens. When you view things in such a way markets are not scary, whatsoever. You just let that new day come and collect your profits, multidirectional.

The peaceful portfolio only comes from the art of hedging and proper position sizing. In fact, a balanced portfolio is indicative of nothing other than humility at the end of the day. For example, let’s say you have convinced yourself Bitcoin is of greater potential in the future than Gold or Silver is… A humble investor, however, would be willing to admit that their synopsis may contain errors and would take a position in both and may weigh that position in slight favor of Bitcoin. Thus, the wise investor understands that even though evidence dictates Bitcoin, maybe there are variables we cannot anticipate. There is no need to have to guzzle Hemlock because you couldn’t see the other side of the story.

My Personal Structure:

So here are the specifics:

First and foremost, I use two accounts in my business—an individual margin account with tier 3 trading authority for naked puts and spreads. Another account, an L.L.C. account, non-margin, for covered calls.

10% of my portfolio comes in the form of a market hedge, primarily, inverted E.T.F.(s), of which I can write covered calls against as the market goes up. Since there is no expiration date on these positions I can do this indefinitely. Now, per Tim’s recommendation, I never fully cover these positions in case a flash crash takes place. However, to account for other eventualities, I also I have a sizable cash position, one set aside for put options as well as buying the market itself at the bottom of the bear market.

Another 20% of my portfolio is a currency hedge. Half of which (10%) is in precious metals (physical and paper combined) and another half (10%) in Cryptocurrency.

60% in stocks and E.T.F.(s) which will benefit from a bullish market, however, 30% of that 60% are commodity related—aiming to take advantage of currency devaluation as well as a rising interest-rate environment.

Then 10% for Environmental Hedging, which in and of itself hedges and balances the remainder. It is an ethical hedge as well as a physical hedge of between the past and the future, between where we are now as a species and where we will eventually have to go in order to survive. As I mentioned last week, if there is a philosophy of trading and investing its first maxim would be the eventual translation of a paper asset into a physical asset. Especially if there is a physical threat to be had.

This week I will submit the second maxim of the philosophy of trading and investing—the idea of humility.

Rome, Italy:

This place is amazing, check it out! Next week I ought to be in Tuscany / Naples. Thank you United States Steel and Freeport McMoran!

4 Replies to “Environmental Hedging: Asset Allocation”

  1. Avatar MARKWEISS says:

    I have been to Rome, it is awesome as I remember. Thank You Bob for showing us this great strategy!!!!

  2. KerenClark KerenClark says:

    Thank you so much for sharing your system in such detail. It has been such a treat being able to see your thought process. I look forward to your blog every week!

  3. Avatar STEPHANIETREVIZO says:

    Wow. Thank you for the information. Keep going 😉

  4. Avatar robertbruceshannon says:

    Thanks kids! Glad youre enjoying it! Smiley face.

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